office at night

COVID-19: Partners in professional practices working from home

What are the tax implications?

Nicky Owen, Partner, Professional Practices
25/03/2020
office at night

COVID-19 has seen large swathes of the workforce working from home and firms may need to consider the tax implications for payments to employees but what is the position for partners in partnerships and LLPs?

Are partners able to be compensated for the costs incurred in working from home?

Partners can be compensated for personal costs they incur which are wholly and exclusively for business purposes. The personal costs that are likely to be incurred for business purposes include the extra running costs of the home, telephone and internet costs and items purchased for the smooth running of a partners’ home office.

Running costs of a home

An allowable deduction is the amount of the expense which relates to the homeworking and will include a proportion of the insurance, council tax, mortgage interest, rent, repairs, water, light and heat. The apportionment will depend on the area used, the usage and the time used for business purposes.

For example, if a partner uses a study for 8 hours a day during the week for three months and the room is one eighth of the size of the house, then all those factors will need to be taken into account when working out the valid apportionment of the expenses. Furthermore, all relevant records including rationale for the apportionment will need to be kept for five years and 10 months.

Over enthusiastic partners, claiming that part of the home is used exclusively for business purposes, will therefore:

  • increase the expense claim
  • restrict the Capital Gains Tax main residence relief available on the disposal of the home
  • possibly generate business rates issues.

Fixed rate deduction – alternate HMRC concession

However, HMRC concessionally operate a simplified  monthly flat rate which is aimed at compensating partners for running costs of a household (except telephone costs, see below), without the need for record keeping. However, there will need to be some form of records showing hours worked at home during the month. HMRC fixed rate deduction reduces the administrative burden of maintaining records of all relevant expenses and appropriate apportionment details to support an estimate of the actual cost.

The amount that can be claimed as an allowable expense is dependent on the number of hours worked from home in a calendar month.

  Number of hours worked Monthly fixed rate deduction
  25 or more £10
  51 or more  £18
  101 or more £26

It may be beneficial to claim on an actual basis, but for a firm the burden of obtaining and maintaining adequate records from all partners could outweigh the benefit.

Telephone and internet costs

Telephone and internet costs are not covered by the monthly fixed rate deduction and therefore partners could be compensated for the business element of the following:

  • calls
  • line rental
  • internet charge.

For many partners there may not be much in the way of domestic line rental; calls may be via their computer or mobile phone. 

Capital expenditure

Now that a partner is working from home, they may decide to purchase items for their “home office” such as printers, chairs, desks, monitors and filing cabinets. Capital allowances can be claimed for the business element of these items.

How does a partner receive relief for these personally borne expenses?

There are two options:

  1. The firm reimburses the partner for the expenses and they form part of the accounts of the business.
  2. The firm DOES NOT reimburse the partner for the expenses, but allows tax relief to be claimed via the partnership tax return.

If the personal expenses are wholly and exclusively for the business purposes they can be deducted at arriving at the firm’s overall taxable profits. A claim can then be made on the partnership tax return. Individual partners cannot make a claim on their personal tax returns. The individual partner would then be given the benefit of the tax relief arising on the personal expenses incurred. Tax relief is given by the allocation of the firm’s taxable profits, see example below.

  Example

  Blake, Jones and Blackaby are partners and share profits equally.

  In the year to 31 March 2021 they all claim the fixed monthly allowance for working from home for 6 months at a rate of £26 a
  month and the business element of their telephone costs are £223, £558 and £372 respectively.

  Blackaby also personally incurred other expenses in relation to IT equipment for his home office, which after an adjustment for
  non-business use gave rise to capital allowances of £1,000.

  The firm's tax-adjusted profit was £450,000.

  The overall taxable profits were therefore £447,379.

  The allocation between the partners will be as detailed below:

   Total Blake  Jones  Blackaby 
   £ £  £  £ 
Tax adjusted profit  450,000  150,000  150,000  150,000 
Less personal expenses:        

Running costs of the home
- Home telephone costs
- Capital allowances

(468)
(1,153)
(1,000)
(156)
(223)
-    
(156)
(558)
-    
(156)
(372)
(1000)
Overall taxable profits £447,379  £149,621  £149,286  £148,472 

  For more information please contact your usual Crowe contact.

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Nicky Owen
Nicky Owen
Partner, Professional Practices
London